Wedbush Equity Research analyst Seth Basham maintains an Outperform rating for Lumber Liquidators Holdings Inc (NYSE:LL) as it beat the bad weather and reported strong 4th quarter results.
We credit adept management with driving solid 4Q13 results despite the dismal winter weather. Not only was Lumber Liquidators Holdings Inc (NYSE:LL) able to beat sales expectations with a very strong 15.2% comp, but LL managed to beat both gross and SG&A margins with nimble management of (primarily advertising) expenses and continued retail price discipline. While demand has, unsurprisingly, slowed in weather-impacted markets, it remains healthy throughout the rest of the country, with comps in these markets running ~12% quarter-to-date. That healthy underlying trend suggests the comp story remains on track, giving LL confidence to maintain its sales and EPS guidance for 2014 and increasing share repurchases. We reiterate our OUTPERFORM rating on LL, with upcoming catalysts of earnings and any resolution to the Chinese supplier sourcing investigation.
1Q comp guidance achievable for Lumber Liquidators
The largest concern coming out of the earnings call revolved around near-term sales trends. Not surprisingly, 1Q14 is off to a slow start, with comps flattish through January and likely similar since then. Weather stricken markets have been comping down ~12% quarter-to-date; should that trend improve to down 2% for the balance of the quarter and the non-weather-impacted markets maintain their ~+12% trend, Lumber Liquidators Holdings Inc (NYSE:LL) should hit the low end of its 3-8% comp guidance, as we detail inside. If the weather-stricken markets bounce to a 6% trend for the balance of the quarter and the non-weather-impacted markets maintain their ~+12% trend, LL should hit the mid-point of its 3-8% comp guidance. We believe this ~5.5% comp mid-point is achievable if the weather improves and underlying demand starts to come back, even with a lengthy sales cycle.
Upside to (Increased) 2014 gross margin guidance
We model 130 bps of expansion for the year. As we have previously noted, gross margin upside remains a key to this story and management’s conviction to raise gross margin guidance at the outset of the year from ~90 bps to ~110 bps points to this upside driven by retail selling discipline, sourcing, increased vertical integration (namely finishing of proprietary brand Bellawood) and transportation. This is despite incremental gross margin pressures in 2014 from mix shift to hardwood and services.
Tweaking estimates, continue to watch the macro
Taking into account minor changes to comps, new store productivity, tax rate, share count and margin rates, we are tweaking 2014 EPS estimate to $3.63 from $3.70. We continue to see the macro as one of the largest risks to Lumber Liquidators Holdings Inc (NYSE:LL). To the extent recent soft housing trends persist, LL’s sales and earnings would be at risk later in 2014 and beyond, in our view.
